Lori Calvasina
Please listen to the end of this podcast for important disclaimers.
Lori Calvasina
Lori, welcome to RBCs markets in motion podcast recorded June 4, 2025. I'm Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. And today we are going to have a special edition of Markets In Motion live from the RBC EPIC Conference, which is our big energy gala of the year. I'm joined by Amy Wu Silverman, our derivatives guru. I believe she's officially our Derivative Strategist, and Ben Fisher, who is a partner in crime to both me and Amy, a Midwest sales expert, and also just one of our Macro Specialists at RBC on the sales side. Ben is going to moderate and so with that, let me just turn it over to Ben.
Ben Fisher
Thanks, Lori. Thanks, Lori. And before we start, I would like to wish a special 14th anniversary to my wife, Tricia Fisher. So let's talk about markets which are flat year to date. So if you've been in a coma for the last six months or so and woke up. You've said that nothing's really happened in the markets, but obviously things have felt anything but flattish in the extreme, moves lower and then the most recent violent rebound. So I know absolute questions are always tough, particularly in this kind of volatile environment. But where are you right now? Are you bullish? Are you bearish? Are you neutral? And if it's the latter, what are kind of the competing factors in your head for markets from here?
Lori Calvasina
Yeah, it's a great kick off question. Ben, and let me just, you know, answer it directly first, and then we'll get into the weeds a little bit. But I would say I'm neutral. Our newly revised year-end target is 5730 we've obviously been a little bit above that recently. We view, you know, our target as a compass, not a GPS. It's the product of a lot of quantitative analysis. 5730 is the median outcome, but it really does reflect the idea that I think we're fairly valued based on the current assessment of the macro backdrop and where we are.
If you think about where we were back in early April. I was baking in a pretty stagflationary forecast, and really a severely stagflationary forecast. So we had inflation in the mid threes. We had GDP for the full year coming in at half a percent that was flowing through to all the models. And, you know, my official target back then was 5550. The valuation earnings modeling, which is really, kind of the purest way to sort of see how all of those macro variables flow through to a fair value estimate for the S&P that was coming in at, I think, 5351. You fast forward to now, our economists have raised their GDP forecast to 1.3%, they were around 1% before, and they've pulled their inflation numbers down from kind of that mid three range to a high 2%. So that's changed our assessment of where the valuation multiple can come through. That's also changed our assessment of some other tailwinds as well. But now we're getting to that 5730 so we think that the 5730 reflects a step up in the macro backdrop that occurred after we got that shift from 145 on China in terms of tariffs down to 30%.
Right after that happened, I got a lot of questions from clients: ‘Well, why aren't you just going back to your original target that you had in January of 6600 or why aren't you going back to your 6200 that you had in mid-March?’ And I said, ‘Look, you know, we've incurred some damage. It's going to take us a while to assess that damage and really what it entails.’ And I am generally a fan of the idea of the resiliency of the US economy and the resiliency of corporate America, but I don't think we went through that episode unscathed. And so we think that new set of macro forecasts is a more appropriate thing to look at, and that set of macro forecasts is just not as good as what we saw back in mid-March or January. You know, one other thing I would just add to your question, Ben, on kind of the volatility of the year, it's been so lurchy. But I think every move, while it's been intense, has been very well deserved. And if you go back to April, the low on April 8, we bottomed out at what we call that second tier of fear, a growth scare, where you have sort of a recession near miss, a fear of a systemic issue that never really comes to fruition. The market bottomed at an appropriate place. I think it fell an appropriate amount for what we had endured back then. And the rebound, I think, has been well deserved too, but it does feel a little bit rich right now.
Ben Fisher
Got it. Yeah, and same question for you in the volatility market. Obviously, you've seen pretty extreme moves in the VIX. Now on the surface, looking at calm levels. But you know, I know you've talked about under the surface, things are not calm at all. But, where are you right now? And what are volatility experts like yourself looking at right now?
Amy Wu Silverman
I would say in the world of volatility, that coma example you gave, kind of works too, in the sense that, if you just woken up from January to now, it seemed like the VIX hasn't done much, but we know we spiked to the 60s in the VIX. We know we had similar intraday moves that would harken back to February 2018 through August 5, 2024, and it continues with the volatility outlook, I would say that we discussed in the beginning of the year, which is, just expect volatility potholes, especially because we continue to not only be very data driven, we continue to be very news flow driven. And I would say one of the most common questions I get from investors is, ‘Why is there such a big gap between the uncertainty I feel and the volatility we see?’ And what I thought was so interesting, if you go back to maybe two months ago at this point, Scott Bessent actually called the top of the VIX. He actually said in one of his interviews, ‘I think we've seen the last VIX spike,’ I thought that was very interesting for someone in the administration to specifically discuss. And I would say, I have to disagree. Because what has actually happened, if you think about the post Liberation Day moves, and with the current news flow coming out of the courts and IEEPA is you've actually taken the distribution of outcomes and made them wider. That's something we've talked with investors about, which is now that we have a potential court ruling that is still flowing through the system you went from the idea of your baseline tariffs maybe being 10% to possibly being zero, if it gets voted on in a different way, right? So your actual distribution of outcomes now is greater than it was before, even though the market has recovered. And so you actually have marginally fatter tails now, both to the left side as well as to the right side that you did not have before you got the potential ruling out of IEEPA.
The other thing I would say is, when you think back to how investors were positioned, there's been a pretty big dichotomy between how retail investors were positioned, especially through the options market, and how institutional investors were positioned. So institutional investors pretty dramatically derisked and degrossed. You did not see that out of retail. They were happily buying the dip the entire time and you could argue that they won round one, but we don't know about round two yet. As it relates to that, institutional investors have had to jump into the pool more quickly. And Ben you and I have discussed this a lot, but when that happens, you sit on that bit to the right tail quite heavily, that thumb is on the scale there, and that is just as much of a risk to institutional investors as it is that we get a severe market drawdown. So, what we're seeing right now is there remains overall caution, and you see that more longer term than you do shorter term. We can see that in the evidence from the term structure of the options market and our tails are actually fatter now than they were about a month ago because of the cross currents of potential decisions on even what the legality of tariffs are.
Ben Fisher
Just as a follow up to that, is there a certain catalyst for vol to explode back up to previous peak levels that investors in volatility are looking at, or is it just kind of the unknown tail risk that just needs to be accounted for consistently?
Amy Wu Silverman
So you know, this will make my 11 year old daughter cringe, because I'm always cringe, but my bad vol joke is, there's another Greek that we need to start considering, and it's not Delta Gamma, Theta, Vega, it's Tweeta, and it's just the implied vol sensitivity of Donald Trump's tweets. And, you know, I say this jokingly, but it has real implications. We're in a world now where one of his all cap tweets with five exclamation marks can literally change your framework. And so when you ask, what are the catalysts? Tweeta, I would say is the main catalyst. But outside of that, anything we see in terms of the court rulings, anything we see, frankly, this is outside of tariffs, but in terms of the big, beautiful bill, and then obviously any sort of escalation from the potential trade resolution, so something out of China, something out of Europe, that could either escalate or de-escalate the situation quickly and rapidly reprice that right and left tail.
Ben Fisher
Makes sense. I'd say from my end, it seems like most investors have missed this recent rally and haven't participated as much, and now are kind of deer in the headlights, so to speak. I know Amy, you had asked me, ‘What are equity investors saying? It seemed very quiet since Memorial Day and more recently,’ and I would say that's true, and I think it's because this rally happened so quickly that they missed it, and now it's like, what's next? And you know, to your point earlier, there's a lot of competing forces. So like you two, are both road warriors, on the road all the time, constantly meeting with investors. What is the just the overarching sentiment, and what are you looking at to kind of gage your thought process from here?
Lori Calvasina
Yeah, so I would say, you know, there's, there's what we hear when we're out on the road, the questions people ask. And then there's also what we see in the data. And I would say the data is actually pretty messy. I'll get more on that in a minute. But if I'm just thinking back, I've been to kind of a lot of random places over the last few weeks, different parts of the country, some meetings outside of the country. My best way to summarize, probably what I've heard, actually, is a quote from one of my investors, Portfolio Manager I've known for a long time, that said, ‘You know, we upgraded our portfolio in April,’ meaning they took advantage of the liquidity opportunity, and they said, ‘Now what?’ And, you know, I think there is a sense of a lot of people I talk to are just waiting to see what happens with the hard data. Are waiting to see what the next policy announcements are from the administration. Are waiting to see, you know, what's happening with these deals. And frankly, another thing people are waiting for is corporate earnings. The next reporting season is right around the corner, starting up in mid-July. It seems to me, you know, we're speaking live from the Energy Conference, and it's really packed here. But as I've been out on the road, we've just noticed a lot of people are away out at conferences trying to get those company breadcrumbs. And so I think it's kind of a discovery process right now, and that's appropriate.
You know, if we think to that next reporting season, I think we're going to find out if this confident tone from the industrials really plays out. They've been sending the message that they can manage through. Consumer companies have been sending a much more mixed message about the health of the consumer, and, you know, evidence of trading down and more cautious behavior under the surface, even though overall spending is okay. We're going to get updates on that, and we're going to see, from everybody, how are margins coming through? What's happening to business sentiment in terms of planning? You know, has what's transpired been enough to unlock some activity, or are things getting worse? And we just don't know the answer to these questions. And I think investors I speak to, these are all the things we talk about, and they're trying not to act before they really have information. And I know on Wall Street, we all want to put on the trades right away, but I do think it's appropriate for people to be patient right now.
Data wise, things are messy. The CFTC data on US equity future positioning, which Amy's team watches really closely, never collapsed. That keeps me a little nervous, that we never sort of had that wash out. AAII which is more of a gage of high net worth retail, but I think, frankly, does capture really well the sentiment I see among my clients as well, that had been sitting down at two standard deviations below the long term average for a while. The last few weeks, it is rapidly ascending. Where we are right now. I mean, we're basically back, you know, we've gone from minus two standard deviations to minus one standard deviation, and we're about to cross over into that range of average to minus one. And that range of average to minus one cuts your expected return in the S&P 500 in half in terms of forward gains. So we're just not in that sweet spot where you expect that big snap back, that snap back has, I won't say it's completely played out, historical data tells you there could be a lot more room to go in it, say 6400 by the end of the year. But we have seen, you know, quite a bit of it already.
Ben Fisher
For sure, and just kind of sticking with the sentiment angle from your side, I know you've written a lot about the recipe for that FOMO trade for the kind of mag seven the most important stocks is there, but hasn't happened yet, where are you in that thought process? What are you watching to see if that kind of FOMO force chasing momentum bid that we've seen since COVID kind of kicks in?
Amy Wu Silverman
Yeah, I would say two things. The first is similar to Lori, it's been quite messy, and we've kind of had to dig through. And the second is, there's been a lot of activity, and I think essentially what is happening is, in general, institutional investors are quite bearish and cautious, and the pickle they're in, effectively, is that they know it's long term in nature, so this idea of when we're going to see that translation between all the really poor sentiment data and the actual hard data, everyone thinks it's going to happen. That's how I'd characterize that. They just don't know when. And so I don't want to say there hasn't been hedging, there has, but the way it has been expressed on the downside has not been that short term in nature.
So what we are actually seeing is, for instance, investors saying, is this something that actually happens six months, one year, maybe even 18 months down the line? That's why I think you see term structure. So again, where longer term volatility is trading relative to shorter term why you see the steepness in that term structure because there is that nervousness. And if you asked almost any institutional investor, they believe that translation is going to happen. They just have a very difficult time trading it right now. I think it's one of the reasons we're seeing a general demand for what I would characterize as quantitative investment strategies, ones that essentially systematically hedge, because you're taking out the emotional element of, ‘Oh, crap. I got April 2 wrong, and then I got whipsawed when I tried to get it right.’ There are investors who are saying, ‘Look, I think at some point the other shoe will drop, and I don't know when, and I probably will never get a good gage of whenso I'm going to do these kind of dynamic, systemic hedging strategies to protect myself for what could be an 18 month, excruciating process.’ So I want to make it clear that that is happening. It's just not happening in the very short term.
Now the second thing that is happening is the same pickle that you have for those who are cautious long term is you do get caught up in these vicious up crashes. Exactly what happened when we got that weekend news that there had potentially been some resolution between Xi Jinping and Trump, which also could, to be clear very well turn another weekend from now, Tweeta is a big risk, right? And so you have exactly what you asked me, which is this massive benchmark concentration risk where if mag seven rips, and you benchmark to an index that has a very large weight to mag seven, you have to participate, because, you know, there's another risk that I think none of us ever talk about, but is very much on the mind of investors, which is career risk, and this idea that look at the end of the year, if everyone's down and you're down, I don't know that that is as bad as everyone is up and you are not up, you know? And I think that's something, again, that we never really talk about, but is a moral hazard or risk, whatever you want to characterize it in the market. And that's why we see that FOMO. That's why we see that right tail. The best signal I can give you is to watch for when call implied volatility on a short term basis, so one week two week one month starts to on an absolute level, actually outweigh put implied volatility. That's again, not supposed to happen, not a normal relationship. Of course, I've seen all these normal relationships break down, but that, to me, is a very early indicator that we're getting into a momentum cycle.
Ben Fisher
Got it and from your angle, Lori, is the whole growth versus value, or the most important stocks, are investors asking about that? Are they still more asking bigger top down questions, like market as a whole?
Lori Calvasina
I do feel like my meetings have been a little more focused on top down as a whole and small caps. When people ask me about the growth value trade or like the mag seven, or the broadening, whatever, you know you want to call it, I've been a little bit different than most folks this year, and we've actually seen, you know, what I suspected would happen play out, which is, we've just had a vicious tug of war between the two. And if you look at growth versus value, or top 10 versus rest of market, we just keep lurching in one direction after another, and it lasts a little bit, and then you lurch really hard back in the other direction. So I think that tug of war continues. I think for a few reasons.
Number one, there's no real valuation differential between the two. And what I mean by that is, if you look at the PEs of the two baskets separately, they hit a ceiling, moved back down, never hit average, and they're kind of similar distances versus their average. If you compare those two PEs and just do a ratio, they're just tracking their relative long term growth expectations, and those have come in just a tiny bit for the mag seven but, not all that much. So they're just fluctuating on those shifts in long term growth expectations, which still, frankly, favor the mag seven right now. And we see that on other data points as well. I do think a sluggish economic backdrop like the one I'm baking into my numbers, typically favors growth, so it's hard for me to sort of see how the value trade really gets going from a domestic economic perspective, unless we can start talking about two, two and a half percent type GDP.
The counter to that, though, and, you know, again, maybe these countervailing forces, I think, contributes to the tug of war is, you know, we do traditionally see that when the US is outperforming other geographies, that usually that growth trade is working. And so when we've seen the US come under pressure, that mag seven cohort has gotten hit very hard. And you know, you see it in terms of data, if you want to put it into context of what's going on the last few years, whenever I've talked to European investors in particular, they want to talk about the growth trade. They want to talk about the mag seven trade. They've owned the US for its growth appeal. Now, you know, when I talk to some non-US investors, and they're debating US non-US, they've been bringing up the idea of greater productivity in the US, right? And AI is a part of that theme. But I think to some extent that trade is just, you know, kind of getting caught up in this US/non-US, dynamic, end of US exceptionalism argument.
Ben Fisher
Would you say in your conversations, and this question for either of you, because I know you talk to a lot of non US investors, do you think that death of the US exceptionalism trade is overstated or just getting going? Is it real from your standpoint?
Lori Calvasina
There was a moment, I would say, in March, maybe early April, but you were seeing these outflows from the US starting to pick up, big inflows into Europe. And there was also better GDP forecasts for Europe. Those were kind of rising economic surprises in Europe were picking up, and those things were headed in the other direction in the US. And it felt like at that moment, there was a really sort of strong consensus starting to emerge, like, ‘Hey, it's time to buy Europe. Hey, it's time to look outside the US.’
Fast forward to where we are now, you're not seeing those same ramp ups in European GDP, and the economic surprises have softened, and so they don't look that different from the US in terms of trend. And now, I would say it's being more debated. My take on it is that what tariffs have done is open up a door that was closed very tightly and locked for a long time, which was curiosity and other geographies, and that door has been opened. So there's more room for debate. There's more room for evaluation. You know, I'm seeing the Western European equity flows are starting to fade. Germany just turned negative. It had been very strong, but France is getting better. We've used the word messy a lot on this podcast. The flow dynamics right now are a bit messy. My recent non US conversations, we are starting to get some questions about the tax code and some things sitting in the one big beautiful bill that people are concerned might be less friendly to non US investors, so things like that, this intersection of economic policy and foreign policy, that's sort of a feature of the current administration we're in. We're going to continue, I think, to see more debates like that that are going to keep this conversation going.
Ben Fisher
And from your standpoint, I know derivatives investors usually tend to make bigger macro thematic bets. Have you seen that positioning for some rotation into non US assets play out in close or trades?
Amy Wu Silverman
So first, the two big trades we've seen in the market are for China and for emerging markets. And when I have conversations with investors about what the thought process is, they actually characterize it as more of a right tail hedge to the idea that we could get a relatively speedy resolution to the US-China trade tensions. Again, when I say right tail, it's this idea of no one has it baked in their medium probabilities, but if it does happen, that obviously tectonically shifts how people have to reprice things.
In terms of your first question about US exceptionalism. When I talk to non US investors, it's not just a story about the countries, it's also an FX story, and it's also partly a treasury story. So a number of investors have said, ‘Look, if there continues to be issues in the treasury markets going back to that big, beautiful bill, and you know that adding a lot to the deficit, mag seven could actually be a flight to safety hedge, right?’ So there are, again, these countervailing forces that would keep non US investors, perhaps sitting in one cohort of the stock market, but not all of it. I do think that we've definitely gotten the most Euro curious that we ever have in the last decade of folks calling Euro versus us out performance. This is definitely the height of Euro curiosity, in my opinion. But I still remember riding in that Waymo with Lori, and just thinking to myself, tech is really incredible. AI is really incredible. And I wouldn't count it out yet.
Ben Fisher
There’s probably less negativity on US and more FOMO about missing emerging markets kind of non US upside. Since you mentioned treasury, maybe final question, the rate conversations, I mean, they've seemed to have died down now that the 10 years say more in a comfortable range of 4.4-4.5. But, you know, every time rates spike, we get questions that I know you've done a lot of work in terms of when it gets concerning for equities, and then I would love your take just on rate volatility versus equity volatility.
Lori Calvasina
You're certainly right. I mean, we've been getting a lot of questions, not so much, on where I think yields are going right, but just when does it become a problem for the stock market? You know, if you go back to 2023, people are right to be worried about this, because we did see in the fall, well after SVB, but we saw this big move up in the bond yield. We went and hit 5% very briefly, and you got a 10% drawdown in the equity market. And that equity market drawdown stopped when 10 year yields stopped moving up. So, you know, people have that recent history in their mind, they sort of remember 5% being a problem, and so they're asking us about the levels. And I'm not being terribly original with this, right, but I do think that 5% bogey is the problem. And not just because of the history, but when I kind of flow that through to my different models, I keep coming up with problematic signals on the stress tests. And so one of those is just our earnings yield gap model. If you assume the earnings yield in the S&P stays flat with where it is, and you model in, I just tested five two and five three, just these point 1% increments. And if you were to go up to five three on the 10 year treasury yield, that would flip our earnings yield gap model into a range that historically has produced negative returns in the stock market on a 12 month forward basis.
Right now where we are today, we're still in a range that tends to be followed by gains on that time frame, but we just are starting to run out of wiggle room. The other way we float it through the modeling is going back to that valuation model that produces the 5730 which is, you know, our model that goes back to the 60s. We look at rates, inflation and PCE, and use it to project a trailing PE in the market. So if I take that model and I take out the Fed cuts, I take inflation up, I think we went to 3.25%. So not that hot, but a bit hotter than where our numbers as a house and consensus are right now. And then we took the 10 year treasury yield to 5% you know, it comes up with a more subdued valuation reading, what do you use for earnings? So I just took in that scenario, 2.46, which would be flat versus last year, right? We have a lot of years in the market where earnings go nowhere for a few years. So take that bearish earnings assumption. You're going to get down to about 5000 on the S&P, so you're essentially going to retest that growth scare low that we had back in April. And it may not all play out that way, right, but you know, clients have been really interested in that math of how the assumptions would all fit together, and I think it's a reasonable expectation for a bear case at the end of the year, especially if we avoid recession, but a few things go wrong.
Ben Fisher
Amy, anything interesting, like rate versus equity volatility that you're watching?
Amy Wu Silverman
So the biggest traumatic experience, I think, in the last five years, is that we couldn't count on the inverse relationship between bonds and equities, and because so many portfolio construction of hedges is based on that relationship being inverse. When that breaks down and they become very correlated, it really implodes a lot of portfolio construction. So going forward, that, to me, is the biggest risk that we see. That again, things have been very well behaved. Things have been doing what they're supposed to be doing. But to me, some of the demand that we've seen for these more dynamic hedging opportunities and QIS is because of the fact that we can no longer rely on bond equity correlation behaving as it had for many, many years before we got into the post COVID era. So when I look at move versus VIX now, which is a good proxy for your rate versus equity vol correlation. It's been behaving, right? Everything looks okay. But if we start to get nervous about the big, beautiful bill, we start to see that divorce of that correlation, then I think you have to start being worried, and you're probably going to see a rapid increase in demand for hedges because of it.
Ben Fisher
It makes sense. Well, that's a good place as any to close. And that’s friendly reminder that EXTEL formerly known as II ballots are now open, and there is nobody more deserving than our Lori Calvasina for the portfolio strategy category. Like you have seen and heard in this podcast, her ability to give you the most real time sentiment and feedback from the road. And I know Amy would echo those thoughts, as she is often on the road with Lori?
Amy Wu Silverman
I certainly would, and because Lori wouldn't let Ben and I do a music video for her, this is my only avenue to embarrass Lori when I say, Lori, I'm on the road with you quite frequently, and I'm constantly in awe of just your passion and your diligence and the stick to it-ness of you looking at data. I wish you guys could see how much work this woman does and how many Diet Cokes she drinks. It's very unhealthy. I have to tell one anecdote, which is I remember we were landing in Denver. It had to be past midnight already. I'm delirious. I'm ready to go to bed. You know, our next meeting is five hours from now, and this woman is still reading Bloomberg transcripts, because you can just tell how much she cares not only about the process, but about bringing quality content to the clients. So I cannot think of a better person to be number one in EXTEL than Lori Calvasina.
Lori Calvasina
I'm about to crawl under a table, but I'll say that. What I remember about that night is that I had also pulled up the 10 year yield chart. It was like literally after midnight, and we were trying to figure out if 10 year yields were actually still trading. And I got to the hotel and turned on Bloomberg and watched Kriti Gupta and Guy Johnson talk about the move in the bond yield, because Europe was open and I was still awake.
Amy Wu Silverman
I was asleep, but she was still awake. That's the point, guys, all right?
Lori Calvasina
Well, Thanks to all our listeners. We know this was a bit of a longer podcast than usual, so we appreciate you sticking with us. I thought it was a great conversation, and if any of you have further questions, please reach out to your RBC representative.
Disclaimer
This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or a solicitation and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.